The non-public credit score market was resilient in 2023, however “it’s more likely to weaken within the close to time period,” in response to Oaktree Capital Administration.
The funding big stated that efficiency final 12 months was supported by “sturdy US financial development” and actions taken by non-public fairness sponsors and lenders to help weak debtors.
Nevertheless, it famous that firms at the moment are beginning to see the total influence of latest rate of interest hikes and warned that efficiency might deteriorate going ahead.
Learn extra: Oaktree raises $3bn for up to date particular conditions fund
“We anticipate an growing variety of firms to face liquidity challenges within the coming quarters, particularly debtors with unitranche floating-rate debt taken on earlier than 2022,” Oaktree stated in its quarterly market replace.
“Whereas most firms have been capable of handle liquidity issues with short-term options, comparable to tapping revolving credit score services, stress will probably mount within the coming months if rates of interest keep elevated. Moreover, non-public fairness sponsors might not inject capital into struggling firms to the identical extent that they did in 2023.”
Learn extra: Oaktree Specialty Lending sees rise in annual funding revenue regardless of flat This autumn
Central financial institution coverage might negatively influence the lending atmosphere as central banks look set to maintain charges greater for longer than markets are at the moment anticipating, Oaktree added.
“This will discourage new offers and make it difficult for present debtors to roll over their debt, particularly extremely leveraged sponsor-backed firms,” the agency stated.
Regardless of the challenges, Oaktree famous that demand for personal debt financing seems to be growing and predicted that demand for refinancing is more likely to develop considerably within the coming years as 40 per cent of the direct lending market is ready to mature in 2024 and 2025.
Learn extra: International non-public debt fundraising in 2023 barely down from 2022
It additionally highlighted alternatives for various lenders to realize share in new, specialised markets resulting from weak point within the banking system.
“For instance, non-public credit score traders are more and more discovering engaging alternatives in all kinds of structured credit score transactions, together with these involving music royalties, life sciences royalties, gear finance, commerce factoring, lender finance, plane finance, transport finance, and rail automobiles – simply to call just a few,” Oaktree stated.
“Loans via these intermediaries are sometimes producing returns on par with – or perhaps a little above – these seen in company direct lending, and, importantly, they sometimes characteristic a broad, diversified, world asset base.”
